Two significant amendments to the Franchising Code of Conduct (the Code) have been made in recent weeks, with changes to civil penalties to come into effect from 15 April 2022 and changes in relation to the mandatory Franchise Disclosure Register due later this year.
What are the changes to penalties?
A new ‘mega’ penalty has been introduced and it applies to the contravention of seven clauses of the Code:
1. Clauses 17(1) and (2) – Failure to disclose materially relevant facts in relation to financial details and other matters such as change of ownership, criminal or civil proceedings or judgment recorded against the franchisor, and failure to disclose changes to the materially relevant facts;
2. Clause 33 – Restricting franchisees’ freedom to associate for a lawful purpose;
3. Clauses 46A(1), (2) and (3) and 46B which apply to new vehicle dealership agreements in the automotive industry only – Failing to compensate franchisees for early termination of their agreements where the franchisor exits from the Australian market, rationalises its network or changes its distribution model, and failing to buy back vehicles, spare parts and tools under these circumstances, or if the agreement is not renewed. Failing to provide reasonable opportunity for a franchisee to make a return on their investment.
If any of the above clauses are breached by a body corporate, the ‘mega’ penalty is the greatest of the following:
2. if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, has obtained directly or indirectly and that is reasonably attributable to the contravention—3 times the value of that benefit;
3. if the court cannot determine the value of that benefit—10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.
If the franchisor is not a body corporate, the ‘mega’ penalty for a contravention is $500,000.
The issue for Franchisors moving forward is to ensure they have processes to monitor events or conduct relating to materially relevant facts that require ongoing disclosure. The failure to do so could have severe financial consequences to Franchisors.
Double penalty units
Additionally, all other existing civil penalty provisions will now attract 600 penalty units, instead of the current 300 penalty units. Some existing provisions of the Code that are not currently penalty provisions will also become civil penalty provisions on 15 April 2022 along with new provisions, with contraventions of the following attracting 600 penalty units:
1. Entering a franchise agreement that limits or excludes the obligation to act in good faith;
2. Failing to provide an information statement to a potential franchisee within seven days of the prospective franchisee formally applying or expressing an interest in acquiring a franchised business; and before the franchisor gives the prospective franchisee a copy of the Code, the franchise agreement and the disclosure document.
3. Entering into an agreement that requires a franchisee to pay the franchisor’s costs in settling a dispute under the agreement;
4. Unreasonably withholding or revoking consent to a transfer of a franchise agreement;
5. Terminating a franchise agreement where the breach has been remedied;
6. Failing to provide franchisees with a copy of the marketing fund audit report within 30 days of the preparation of the audit report;
7. Failing to give seven days’ notice of termination on the grounds of special circumstances where the termination is mutually agreed by the franchisor and franchisee; and
8. Requiring franchisees to undertake significant capital expenditure during the term outside the scope of the exclusions in clause 31(1) of the Code.
The current value of a penalty unit is $222.00, with 600 penalty units equating to a fine of $133,200.00.
What is the Franchise Disclosure Register?
The Franchise Disclosure Register (Register) was first announced in 2021 with an exposure draft in response to the 2018 Inquiry into the Franchising Code of Conduct. There was considerable debate on the extent of disclosure required by the exposure draft. Fortunately, the final regulation requires minimal mandatory information.
The Competition and Consumer (Industry Codes—Franchising) Amendment (Franchise Disclosure Register) Regulations 2022 governing the Franchise Disclosure Register were made on 31 March 2022 (Regulations). Under the Regulations, franchisors will be required to provide certain information to the federal government for inclusion on the Register. The Register will be available to the public.
Franchisors that give a disclosure document on or before 31 October 2022 must provide information for inclusion in the Register. If the franchisor is a master franchisor in a master franchise system, and has two or more sub franchisors, the same obligations apply. The information must be provided on or before 14 November 2022.
A franchisor must provide the following information for inclusion in the Register:
1. The name of the franchisor;
2. The name under which the franchisor carries on business in Australia relevant to the franchise;
3. If the franchisor has an ABN—the franchisor’s ABN;
4. The address, or addresses, of the franchisor’s registered office and principal place of business in Australia;
5. The business telephone number and email address of the franchisor;
6. The ANZSIC division and subdivision codes for the industry in which the business operated under the franchise operates; and
7. Any information required to be provided to the Secretary as required under clause 53C(4) of the Code.
Franchisors may also include in the Register the following documents:
1. Disclosure Statement;
2. Key Facts Sheet; and
3. Standard form Franchise Agreement used by the franchisor.
Before the franchisor provides the document for inclusion in the Register, the franchisor must redact from the document the following kinds of information:
1. Personal information that relates to an individual other than the franchisor; and
2. Information that relates to a particular franchisee or a particular site being occupied by a franchisee.
The franchisor may redact from the document information that is of a commercial nature and is commercially sensitive
Clause 53(C)(4) provides that Secretary may also require the franchisor to provide to the Secretary information that is required to be included in a disclosure document if the information is not personal information that relates to an individual other than the franchisor information that relates to a particular franchisee or a particular site being occupied by a franchisee.
Other franchisors that are proposing to enter into a franchise agreement, but have not given a disclosure document by 31 October 2022, must also provide the above information. However, the information is required to be provided at least 14 days before the franchisor enters into the franchise agreement with the prospective franchisee.
The information provided by franchisor must be updated at least once year, by the 14th day of the fifth month following the end of the financial year (i.e. within two weeks after the franchisor updates their disclosure document each year). Failure to provide this information will be a breach of the Code and incur a civil penalty.
When does this apply?
The Register will become available from July 2022 and will become mandatory from 14 November 2022.
What does this mean for franchisors?
It is imperative that franchisors familiarise themselves with the clauses that attract the ‘mega’ penalty from 15 April 2022 to ensure compliance. A simple failure to comply with clause 17 for example, in failing to provide a statement or declaration of solvency or disclose materially relevant facts to franchisees within a reasonable time, could mean that a franchisor could face significant penalties.
Franchisors should also ensure compliance with the clauses that will be civil penalty provisions from 15 April 2022, as non-compliance will now have much greater consequences. Franchisors should consider their practises and ensure that all required time frames and requirements are adhered to.
Franchisors will also need to provide the required information for inclusion in the Franchise Disclosure Register. The information must be provided in a form and manner approved by the Secretary and be provided on or before 14 November 2022, and needs to be updated each year. Further updates from the government in relation to the Register are expected in coming weeks and months.